What’s Spinning Off? (Plus Pros and Cons)

By Indeed Editorial Team

Published October 18, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Sometimes, companies can become so large in budget and scope that creating smaller, independent companies for a particular audience can be beneficial. Spinning off is when a company creates a new company by selling shares of their business. Learning about spin-offs can help you learn about diversifying business strategies that large corporations use. In this article, we review what a spin-off is, how it differs from a split off and what advantages and disadvantages companies face when they choose to employ these tactics.

What is a spin-off in business?

A spin-off in a business is when a company creates an independent alternative company by selling shares to another existing business while still owning the patent as the parent company. A company expects a spin-off to be worth more in profitability rates as its own independent business, rather than a department or faction of the parent company. When corporations spin-off a business, that entity creates its own management system under a new, renamed corporation. Depending on the details of the spin-off, owned companies may keep certain amounts of profits before allocating them to parent companies.

Related: How To Define a Business Strategy

Why companies create a spin-off

There are multiple reasons a company may choose to create a spin-off, including:

Independent profits

Businesses may create a spin-off business because a product is doing exceptionally well. Offering a department the opportunity to independently hire, innovate and create additional products allows the business to grow without restriction or management from its parent company. If a department becomes a spin-off business, it still has all the funding and resources from its parent business, along with the freedom to expand and increase an already profitable production rate.

Resource allocation

Alternatively, if a department of a business isn't doing as well as a company hopes, they can choose to spin it off as an independent business. While this does not remove them from the parent company's business activities, it helps the parent business focus on other more important needs and departments, while the spin-off business manages and markets itself. Employing an independent management and marketing team to a spin-off business can help both businesses focus on improvement.

Related: 10 Business Strategy Examples (And Why It's Important To Have One)

Marketing needs

A business may create a spin-off company because both entities have different marketing needs. For example, if a company that is famous for making soda products creates a department that produces chips and snacks, allocating this entity to a spin-off business not only gives this group the opportunity to market independently from the parent company's team, but it also encourages this spin-off company to make different marketing choices that may be best for profitability in both cases. When businesses want to diversify products in a major direction, spinning off a company may allow each team to pursue different goals.

Pros of a spin-off

There are multiple pros to starting a spin-off company, including:

Increased profitability

When a company creates a spin-off, the business gives the new entity a chance to increase profitability independently. Because a spin-off company has significantly less overhead, payment obligations and taxes, but all the same funding due to the parent company, a spin-off company can create significant profits if it succeeds. If a spin-off company receives promotional benefits from a popular parent company, innovative ideas within the small marketing team may have a better chance of receiving high sales activity.

Focused marketing teams

As an independent company, a spin-off may have more freedom and focus in marketing. Smaller businesses have more freedom of choice and marketing profitability when they're able to act in response to ideas and more effectively progress action plans. Additionally, a marketing team within a spin-off also has the freedom to market diverse products that the parent company doesn't specialize in, creating proficiency that the parent company doesn't possess.

Related: 10 Marketing Strategies To Grow Your Business

Cons of a spin-off

There are some cons to a spin-off, including:

Loss of staff

When a business creates a spin-off company, they reallocate some staff to help ensure the spin-off thrives. This may mean loss of marketing and production staff, and may also lead to building and additional relocation costs. However, if a company prepares for a spin-off by allocating funds for the maneuver in the future, it may be able to compensate for such fund and staff losses quickly.

Lowered share price

Initially, when a business creates a spin-off company, they experience a loss of shares. This is because creating a company involves selling shares for company creation rather than for profit. In the event that the spin-off company doesn't do well, the company may experience permanent share loss. If the spin-off business does well, the parent company can regain these losses.

Spin-off vs. split off

There are many differences between a company spin-off and a company split-off, including:

Company independence

In a spin-off, the parent company retains complete ownership of the new entity. While the spin-off company can make independent marketing decisions, sell different products and make a mostly independent product, they remain part of the parent company concerning select amounts of their products and share values. In contrast, a split-off company divides itself almost entirely from the parent company, receiving no obligatory funding after a full split.

Sometimes, a split-off company may receive funding from the parent company after the initial split. After the divide, a split-off company acts more independently from its past parent company, although it may have some shareholders from the parent company after the split.

Tax allocations

Generally, a spin-off company receives fewer taxes than its parent company because of dual ownership. While a spin-off entity produces its own products and has its own staff, it doesn't receive taxes as an independent business. Split-off companies, however, receive the same taxes as their parent company, depending on the size.

Related: How To Develop a Growth Strategy (Includes Examples)

Shareholder choices

When a company creates a spin-off, shareholders still benefit from both independent parties' profits. While shareholders can invest more within the spin-off company, they still gain equal shareholder benefits from both entities after the allocation, unless they remove their stock holdings entirely. In a split-off scenario, however, stakeholders decide between continuing their hold with the parent company, or the split-off entity, and cannot simultaneously invest their share in both unless they choose to buy more shares.

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